What is the difference between book value and market value per common share? | Finance
By: Rebecca K. McDowell | Reviewed by: Ashley Donohoe, MBA | Updated on February 09, 2019
Valuing a corporation is a complicated business, and there are several different methods used to do it. However, if you are an investor looking to gauge the price of a stock, you can compare the book value per share to the market value per share to decide whether or not to buy stocks.
The book value of shares is the book value of the company divided by the number of shares outstanding; the market value of the shares is the current price of the shares on the open market.
What is an ordinary share?
Shares in ordinary actions are equity interests in the company that issues them. If you buy common stock, you buy part of the business. Common stock can be publicly traded or private. When people talk about owning or buying stocks, they’re usually talking about common stocks. Shareholders who hold common stock have the right to vote on actions taken by the company.
What is a preferred stock?
Some companies issue both common stock and favorite stock. Preferred shares are a type of shares that give their holder a preferred status with respect to the payment of dividends. Preferred stock holders receive dividends before common stock holders.
Preferred shares are also less risky; yet, common stock may have a higher rate of return. Preferred shareholders generally do not have the right to vote on company decisions (although every company is different and some may allow limited voting to preferred shareholders).
Public companies are companies that issue shares that can be listed on the stock exchange on the stock market. Generally, anyone with the money can buy the shares and take a stake in the business. Publicly traded companies must submit financial reports to the Securities & Exchange Commission, and these reports are publicly available so that potential investors and current shareholders can assess the financial health of the company.
Private or closed companies
A private company or closed society, is a company that is not listed on the stock exchange. The shareholders of a private company are usually insiders of the company, but not always, and private companies are usually small companies (although some large companies have closely held subsidiaries). The public does not have access to the shares of these companies, and they do not have to report to the SEC, which means their financial information is not publicly available.
What is book value?
Book value per share is based on the company’s book value. Book value is the value of the business based on its financial statements (books). The company’s financial statements will reflect the value of its assets as well as its liabilities; when you subtract the liabilities from the assets, the number at the end is the book value of the business.
For example, if the financial statements of company XYZ show assets worth $10 million and liabilities worth $8 million, the book value is $2 million, which is the difference between the two. If XYZ Company liquidates and pays off all of its debt, shareholders will have $2 million in equity to distribute afterward.
Reliability of book value
The book value is based on the value of company assets as reported by the company. These values may or may not come from a formal assessment; the values shown are not necessarily what someone would pay for the assets. Therefore, book value is a book number that may or may not reflect the reality of business activity.
What is market value?
the market value of a company, also known as market capitalization, is the current price per share on the open market multiplied by the number of shares outstanding. If the shares of XYZ Company are trading at $25 per share on any given day and there are 100,000 shares outstanding, the market value of XYZ Company is $2.5 million.
Market value reflects perceived value of the business as a going concern and the public’s impression of the performance of the company and its industry. Some industries are more valuable than others. On December 31, 2018, shares of tech giant Apple closed at $157.74 per share and remained flat, while streaming service Netflix closed the year at $267.66 per share and continued to rise. climb in 2019.
Calculation of book value per share
To calculate book value per share:
- Subtract the company’s stated liabilities from the stated value of its assets to get the overall book value. You can get this information from the company’s filings with the SEC, which are public if you buy publicly traded stock.
- Take the book value and divide it by the number of shares outstanding. Using the example above where company XYZ has 100,000 shares outstanding and a book value of $2 million, the book value per share is $20 (the value divided by the number of shares).
Calculation of market value per share
Market value per share is an easier calculation because it is publicly available. Look at the stock market to see the price of that company’s shares that day, and you’ll have the market value per share. The shares of XYZ company are trading at $100 per share, and so that is the market value per share.
Book Value vs Market Value
Book value and market value will not necessarily be the same thing. Book value is based solely on the declared financial situation of the companywhile the market value is mainly based on the cash flow and public confidence how the company will behave in the future, in the company’s industry and in the economy as a whole.
The two values can be identical, close or quite far from each other. If a company’s book value is higher than market value, it could mean that public interest or trust in the company or its industry might not be as high. If the market value is higher than the book value, the public can expect the company or industry to take off.
Investment based on market and book value
You can compare book value and market value to make investment decisions. A person looking at company XYZ, for example, might notice that its the market value is greater than its book value. If Company XYZ has few tangible assets but makes a lot of money from those assets, or has potential to earn a lot of money in the future, its higher market value would make sense. Overall, the market is confident that XYZ Company will become or remain profitable.
Yes the book value is higher than the market valuemany investors will see an opportunity to buy stocks at a low price for a company that is doing quite well. Others may see it as evidence that the company or its industry will no longer be relevant later on.
Examples of book value and market value
netflix filed its third-quarter financial statements with the SEC showing assets of about $23.4 billion and liabilities of about $18.4 billion for a book value of about $5 billion. With 436,084,995 shares outstanding at the end of this quarter, the book value per share was only about $11.47. However, on September 28, 2018, two days before the end of the quarter, the market price per share was $374.13, more than 32 times book value.
Apple, meanwhile, reported about $349 billion in assets at the end of the second quarter of 2018 and about $234 billion in liabilities for an approximate book value of $115 billion. About 4.8 billion shares were outstanding at the time, so the book value per share was about $23.96 per share. Apple stock closed on June 29, 2018 at $185.11 per share.
While Netflix’s book value was less than half of Apple, its market value was nearly twice Apple’s market value in this example (although the reports are from different quarters), showing how book value does not always influence market value.